If you’ve recently purchased your home, you now have a new financial asset that you can tap for funds: your home equity.
Your home equity is the difference between your home’s market value and the loan balance you still owe against it. So basically your home’s value (minus your mortgage balance.)
However, your home equity isn’t like a bank account, where you can draw money at any time. There are a few different financial products you can utilize to access your home equity, like home equity loans, HELOCs, or a cash-out refinance.
So whether you’re looking to renovate your home or pay for another important expense, there are a few important factors that will determine when you can tap into your home equity, how much you’ll be able to borrow, and if you actually should tap into your home equity.
Let’s get into it.
How Soon After Buying a House Can You Obtain a Home Equity Loan?
Technically you can take out a home equity loan, HELOC, or cash-out refinance as soon as you purchase a home.
However, you don’t see very many people doing this because you won’t have much equity to draw from that early on.
Think about it: you’ve paid your down payment, for anywhere from 5-20% of the total purchase price, and then you’ve probably made a few mortgage payments.
If your home was $500,000 and you put 20% down, you’re starting with $100,000 in home equity. That sounds like a lot!
But lender rules turn that lot into a little. According to most banks or credit unions, the sum of your mortgage balance and your desired home equity loan amount cannot be above 85% of your home’s value.
With a mortgage balance of $400,000, you’re already at 80%!
You can only borrow $25,000, and many lenders cap borrowing at 80% of your home’s value, so in that case, you couldn’t borrow anything at all.
So the question really isn’t how soon can I borrow against my home equity, it’s when will I have enough home equity to borrow against.
How Long Before a Home Has Equity to Tap Into?
This question really depends on your mortgage terms, your payment schedule, and the home market.
On average, your home will appreciate 4% each year. So without even paying anything at all, your home will gain value, which goes into your home equity. Awesome! Your home could actually gain more value than that, or less, in a given year - depending on the housing market.
For example, in 2021, homes increased their value by 14% on average because the real estate market was booming! In 2008, home values dropped by 9.5%.
However, you also still have to make your monthly mortgage payments, and this will have the most direct impact on your home equity.
Most mortgages have 10, 15, 20, or 30-year payment terms. The longer the payment term, the slower your equity is going to build.
Some homeowners end up making larger payments or paying off their mortgages early to increase equity faster, but some mortgages have “prepayment penalties,” which means added fees if you try to pay more than your monthly bill.
If you want to know when you’ll have a certain amount of home equity that you can tap into, check out a home equity calculator online like this one to play around with the numbers.
Can You Get a Loan Without Equity?
While there aren’t many loan options for tapping into home equity when you have none, there are a few.
RenoFi Loans (including HELOCs, fixed-rate home equity loans, and RenoFi Refis) allow you to tap into your home’s future equity now to fund home renovations.
RenoFi Loans were created for new homeowners with very little equity who are looking to renovate and don’t have a great loan option to use.
The rules are a little different for RenoFi Loans - you can borrow up to 90% of the after renovation value of your home.
RenoFi helps you determine this future value based on a special kind of appraisal that takes your renovation plans into account.
It also allows you to borrow 11x more than traditional home equity loan options on average.
Should I Tap into My Home Equity?
If you do have enough equity built up to tap in, that doesn’t necessarily mean you should.
Unlike a simple bank account where you can withdraw money and fill it back up easily, your home equity is a little more delicate.
If you do not pay your mortgage bills or your home equity loan bills, you could lose your home. That is why lenders are so strict on how much you can borrow. You don’t want to take risks when it comes to where you live.
You should press PAUSE on tapping into your home equity if you…
-Are using it for unnecessary, frivolous items: You should not be leveraging your home to pay for impractical, fun spending. You’ll most likely be paying off your home equity loan for many years, and you’ll need to apply and pay closing costs. That means the loan should be going toward something essential and worthwhile, like renovations, medical bills, or education.
-Planning to move very soon: Some home equity loans may come with prepayment penalties, so if you are moving, you’ll have to take on those penalties and pay off the loan with the sale price of the home. If you’re doing a cash-out refinance, you’ll have to pay closing costs and extend the length of your loan. It just doesn’t make sense to go through the effort if you’re just going to turn around and sell the house in the next couple of years.
-Don’t have emergency savings: If you run into a financial emergency, your home equity might be your last line of defense, unless you have emergency savings. If you do run into a medical crisis or accident and you have no money to pay for it, a home equity loan can be a good backup option. So unless you already have some savings, leave your home equity for an emergency.
-Are having trouble making mortgage payments: A home equity loan or line of credit will be another large payment on your statement every month. If paying your mortgage is already somewhat of a burden, taking out another loan on top of that is risky. Focus on building up your finances so that you can handle your mortgage payment first.
-Have a very low credit score: While you can certainly qualify for a home equity loan with a low credit score, your interest rates are going to be double that of a person with a high credit score. Make sure to shop around for the best possible interest rate, or try to get your credit score up before applying for a home equity loan.
None of these are reasons to say no to a home equity loan right now, but you should consult with a financial advisor before making any decisions.
You should CONSIDER tapping into your home equity if you…
-Are investing in your home by renovating: If you’re renovating your home, you’re adding value to it. It makes perfect sense to use your home’s value through a home equity loan to add value through a renovation. While you won’t get a 100% ROI, you’ll get some of that money back in return.
-Have a high credit score: If you have a high credit score, you’ll get the lowest interest rates from lenders, which means you’ll pay less in interest over time.
-Are a new homeowner (with a RenoFi Loan!): While most loan products don’t allow new homeowners to tap into their equity, RenoFi Loans do! If you’re renovating your home and don’t have equity built up, RenoFi Loans let you borrow based on the future value of your home.
-Have a lot of equity built up: In 2021, the average homeowner gained over $50,000 in home equity. That’s a lot of money! While it’s great to let your equity build and sell your home for a profit, you can put that money to use now with a home equity loan.
-Have done your research: Most importantly, you should make sure you’ve done your research on all of your loan options and your financial situation.
Again, none of these are reasons to say yes immediately to a home equity loan, and you should always check with a financial advisor before making a decision.
If you’re not sure if a RenoFi Loan makes sense for you, click the “Find a Lender” button below to get an estimate and schedule a free consultation with a RenoFi Advisor.